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Unit 3.4 Operational Decisions
Operations management is a function of business concerned with the transformation of resources
(inputs) into the goods and services used by both the end consumer and other businesses.
Operational objectives are Targets set for Production:
Costs: many firms aim to cut costs, especially if they compete on price. Depending on the type business they can cut its
fixed costs or variable costs. E.g.:
Firm might restructure to remove a layer of management
Costs of an individual product can be reduced
Relocate to a cheaper place however sales may be reduced due to unpopularity
Reduce no of workers – may lead to lower motivation, pressure on remaining staff
Lower unit costs, could compromise on quality
Reduce salaries- anger, resentment, lower levels of motivation
Cheaper suppliers, negotiation, Reduce packaging costs
Quality: Quality operations mean that a business consistently meets or exceeds their key quality targets, playing a crucial
role in ensuring high levels of customer satisfaction.
Those features of a product or service that allow it to satisfy (or delight) customers’
Likely to involve maintaining or improving levels quality. E.g. reduce number of complaints/ refund, aim to ensure 95%
products last 5 years or longer
How is quality measured? Kaizen, outsourcing, TQM
Customer satisfaction ratings An attitude to quality where the aims are zero defects
Surveys , customer complaints and total customer satisfaction.
Speed of service (punctuality)
Everyone is responsible for ensuring high quality
Number of returning customers – brand loyalty
standards
% of waste or defects
How to ensure quality: Disadvantages of maintaining quality:
Quality control (TQM, Kaizen) Expensive
Quality assurance Time consuming- constant training, monitoring
Tests, durability Focusing too much on quality can falter other areas
Research (R+D) Demoralising- repetitive
Stock control, check points Increased pressure hierarchy
Efficiency objectives: aims to make better use of resources – reduces costs and increase profits. May mean increasing
capacity utilisation (increasing output) so it’s closer to the maximum amount a firm can produce. This could mean taking
steps to improve labour and capital productivity.
Innovation – businesses can set their research and development department innovation targets e.g. an objective to
produce an electric car that fully charges in 10 mins. These objectives can be hard to achieve as unexpected problems
often occur
,Flexibility- Businesses need to be able to react to what customers want. E.g. need to be able to vary the amount of goods
and services that they are producing so that volume doesn’t exceed demand or vice versa. Some companies ensure their
work force is flexible by employing people on zero hour contracts
Speed of response- customers perceive a direct correlation between speed and the value of your product or service. The
speed at which a business can operate is important. This might mean decreasing the production time of a product,
decreasing waiting time for customers or getting new products to market more quickly. These objectives are closely related
to the company’s efficiency objectives
Dependability- customers need to be able to depend on a business and businesses need to be able to depend on their
suppliers. E.g. if a store always has items in stock then customers are more likely to shop there, even if the products are
more expensive. A reliable business can often charge more for its goods and services
Amazon state delivery dates for their products and keep customers informed if that date changes using email – this
ensures that their reputation is maintained with customers.
Environmental objectives: pressures from customers and gov can lead to setting these
Ensuring their operational side doesn’t harm the environment is important- especially for their corporate social
responsibility reports
Objectives: Wider Ethical Considerations
Reducing waste, materials
Reducing carbon footprint
Increase recycling
Achieving self-sufficiency in energy use.
How can they act ‘ethically?’
Recycle/Promote protecting the environment
Use Fairtrade
Reduce their use of plastic
Use renewable resources
Pay workers fairly
Source materials in a positive manner i.e. reduce rainforest destruction
Added value is a key operational objective for any business
Businesses transform raw materials into finished products to sell. Adding value will usually increase profits
Achieved by either increasing the selling price of the product or by reducing the costs of the raw materials.
Adding value= the difference between the selling price of the finished good or service and the direct cost of the
inputs involved in making it
Customers will pay more for a better quality product but increasing the value can be done if a business is environmentally
friendly, offers a quick speed of response and is dependable then it can justify charging a higher selling price that its
competitors
Added Value= Direct Costs
Benefits to a business adding value include:
Profit = All Costs
Charging a higher price
A point of difference from the competition
Protecting from competitors trying to steal customers by charging lower prices
Focusing a business more closely on its target market segment
,Branding- provides a business with a means of differentiating their good or service.
Added value is the difference between sales revenue and the direct costs of satisfying that demand - i.e. the value (that is
effectively added to the cost of the inputs into production)
Profit is the difference between sales revenue and ALL costs of a business. It includes costs (overheads) not directly
related to the production process (e.g. admin, marketing
Internal and external factors influencing operational objectives
Operational objectives affect method of production:
Job production- Production of one off items by skilled
workers
Flow production- Mass production on a continuous
production line with division of labour
Batch production- Production of small batches of identical
items
Cell production- production divided into sets of tasks,
each completed by a work group
Lean production- streamlined production with waste at a
minimum
A business that’s trying to improve quality – job or cell
production
Batch or flow- efficiency, dependability and speed of
response obj
Lean production – help environmental and efficiency
whilst ensuring high quality
,
,Capacity utilisation
Capacity is the maximum output with the Resources currently available. Capacity effectively places a physical limit upon the
quantity of goods that a business is able to manufacture at a given time
The capacity of an organisation is the maximum output that it can produce in a given period without buying more
fixed assets- machinery, factory space
Capacity depends on the number of employees and how skills they are
Depends on the tech they have
The kind of production process
Amount of investment
Firms seek to achieve high levels of capacity utilisation as this results in lower costs which can increase their
competitiveness in the market
How can it be Improved- reduce prices, marketing
100% capacity utilisation- increases costs
90% capacity utilisation is better than 100% capacity utilisation
High capacity utilisation is better than low capacity utilisation. However 100% capacity utilisation has drawbacks:
Businesses have to consider all their operational objectives when they plan their capacity usage. Cost isn’t the only
thing to think about- might not be possible to operate at 100% capacity and keep quality levels high
The business may have to turn away potential customers because it can’t increase output any more
There’s no downtime – machines on all the time. If a machine breaks down it’ll cause delays as work piles up waiting
for it to be fixed. There’s no time for equipment maintenance which can reduce the life of machinery
There’s no margin of error. Everything has to be perfect first time which causes stress to managers. Mistakes are
more likely when everyone working flat out
The business can’t temporarily increase output for seasonal demand or one off orders
If output is greater than demand there’ll be surplus stock hanging about waiting to be sold. It’s not good to have
valuable working capital tied up in stock
Firms with high capacity utilisation can increase their capacity
Firms operating at close to 100% can increase capacity to match demand.
Businesses can increase capacity by using their facilities for more of the working week. They can have staff working in
2 or 3 shifts a day, weekends and bank holidays
Businesses can buy more machines (and staff needed to operate them)
Businesses can increase their staff levels in the long term by recruiting new permanent staff. In the s/r they can
employ temporary staff, part time staff or get staff to work overtime
Increasing productivity- reorganising production by reallocating staff tot eh busiest areas and they can increase
employee motivation
If the rise in demand is temporary then business might choose to subcontract work:
Subcontracting or outsourcing is when a business uses another firm to do some work on its behalf e.g. a
manufacturer of detergent might make detergent for a supermarket and package it with the supermarkets own label
Companies can subcontract work to other businesses in busy periods. This means thy can meet unexpected increases
in demand without increasing their own capacity and having the costs of extra staff and facilities all year round
,Ancillary revenue- Ancillary revenue is the revenue generated from goods or services that differ from or enhance the main
services or product lines of a company. Ancillary income is defined as the revenue generated that's not from a company's
core products and services.
People go purchase merchandise, increases revenue
Benefits of full capacity utilisation:
Low unit costs- fixed costs spread out over more units
Higher profits- greater economies of scale, can drop selling price to increase demand
Increased competitiveness
Staff job security
Attract new investment
Whilst 100 capacity utilisation is ideal it doesn’t allow a business to accept any additional orders- no spare capacity
Provide staff training- all staff busy working
Repair or service machinery – all being used
90% capacity utilisation more realistic and sustainable
Under – utilisation is inefficient and increases unit costs
Low capacity utilisation is under- utilisation- inefficient as is means a business is not getting use out of machines and
facilities that have been paid for
1. Under - utilisation increases costs because it causes fixed costs to be spread over fewer units of output, so unit
costs increase
2. Higher capacity utilisation means an increase in the number of units output without increasing the fixed costs – so
total costs are spread over more units
Firms deal with under- utilisation 2 ways:
Sometimes firms have too much capacity and not enough demand- under-utilisation. they’ll first try to increase
demand but if that doesn’t work they need to reduce capacity
Businesses can stimulate demand by changing the marketing mix; price, promotion, place, product
Can fill spare capacity by subcontracting work for other firms
Rationalisation: the process of ‘shrinking’ or reducing the operational size of a business. This can be achieved through
the sale of under-utilised assets so that means the remaining assets actually work more efficiently increasing the capacity
utilisation figure as the same is being produced with fewer resources.
If a business can’t increase demand for their product they need to reduce their capacity by closing part of their
production facilities- rationalisation or downsizing
Businesses can reduce capacity in the s/t by stopping overtime or reducing the length of the working week
allocating staff to other work and by not renewing temp contracts
Also by not replacing staff as they retire (natural wastage) making staff redundant and by selling off factories or
equipment
The key to long term success is planning capacity changes to match long term changes in demand.
Market research to help predict future demand, but not 100% certain. Always risk
Short term changes in capacity utilisation provide flexibility. Firms should be flexible and temporarily increase existing
capacity utilisation if an increase in demand isn’t expected to continue long term e.g. with seasonal goods, goods
heading towards decline in their life cycle and one off special orders.
Long term solutions end up giving lower unit costs- as long as predictions of demand turn out to be true.
,
, Increasing productivity and efficiency:
Productivity= output per worker in a given time period
Efficiency- getting more output from given amount of inputs. Efficient means reducing the waste of all inputs. Greater
efficiency should decrease unit costs and increase profits.
Higher labour productivity- workforce is performing well, labour costs per unit falls
Increasing labour productivity influences efficiency:
Increasing productivity- improves efficiency. If the same number of workers are producing more units of output in the same
amount of time- unit costs will be lower
Improving worker motivation, training, new technology-
can increase the speed
Methods to improve efficiency and productivity:
The importance of efficiency:
Managers are constantly striving to find ways of reducing a firm’s costs and making them more efficient and
competitive.
By getting more output from the same level of input, a firm is able to reduce their unit costs, which allows them to
reduce prices or invest their higher profits back into the business.
More efficiently managed= more competitive
Lean production is an efficient form of production that keeps waste (time, resources) to a minimum, seeks the elimination
of waste from the production process.
Inefficient production methods increase costs, so lean production can save businesses a lot of £
Can use lean production to meet some of their operational objectives reducing waste will have positive impacts on
costs, value added and the environment
Waste is defined as anything that does not add value to a product.
Lean production methods include just in time, time based management and kaizen
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